Free Entry and Price Guaging

Responsa of the Week: Free Entry and Price Gauging

A weekly series by Dr. Meir Tamari about responsa regarding business ethics issues.

In order to demonstrate the work of the halakhic system and its moral considerations regarding a variety of issues in business and economics, I will present a number of responsa drawn from the literature. These represent questions addressed either by laymen or by rabbis or communities to rabbinical authorities and their answers. They cover a period of close to 2000 years and reflect Jewish life in all the countries of the Diaspora. Even though the answers may vary and conflict with each other so that one cannot draw behavioral conclusions from them, they demonstrate Jewish thinking and values in this field.

Many value systems and religious and ethical structures have grappled with the question of a reasonable profit and fair pricing in order to ensure that a just market is operating. That the issue is dealt with in our sources should therefore come as no surprise. Bearing in mind that the free market is legitimate in Judaism, we may wonder why limitations on profit levels were introduced. This is not a matter of anti-market philosophy but simply a requirement that economic justice and protection of the weak be maintained.

The basis for the Jewish concept of the just price and the resultant limitations on profit levels, lies in verse in the Torah, “You shall not oppress your brother” (Leviticus, 25:14). Although onaah is often translated as price gouging, it seems both on the basis of legal definitions and on other verses where the word appears, that the term ‘price oppression’ is more appropriate. In most places in the Bible where onaah is mentioned, it refers to the exploitation of status or strength as for instance, “and a stranger you shall not oppress” (Exod. 22:20), and in Lev. 19:23.

Onaah exists not only in commercial matters but also in speech [onaat devarim], that was considered far more serious that economic onaah (Talmud, Bava Metziah,58b). For instance, one is not allowed to vex converts to Judaism by saying to them, “Remember the actions of your idolatrous ancestors.” Furthermore, onaah applies equally to buyer and seller. Bearing all this in mind, it seems that onaah in price is the exploitation of the lack of knowledge on the part of one of the parties, as to the price levels pertaining at a particular time. Indeed, all the Codes write that if there was full disclosure and acceptance or knowledge by the injured party, this ensures that the protection of onaah does not apply (Mishneh Torah, Hilkhot Mechirah, chapter 13, halakhot 3-4).

However where the acceptance of the price oppression was not voluntary or was due to external forces, the injured party can claim a refund even though there was agreement. “A ferryman transported a fugitive across the river, thus saving him from his immediate danger. Understanding the predicament of his customer, the ferryman charged him far more than the usual price. Naturally, the fugitive pays, knowing full well that he is being over-charged; he really does not have any alternative. Despite his agreement, the fugitive is entitled to claim the protection of onaah and receive repayment of the price differential” (Talmud, Baba Kama, 115a).

On the basis of that Talmudical ruling, Rabbi Joel Sirkis, the author of the Responsa, Bayit Chadash [Bach] wrote the following in early 18th century Poland, in reply to a question addressed to him. The question concerned a manufacturer who needed to buy some cloth to meet a large order: “Even if Reuven agreed to the above average price and the seller made a condition that there would be not be any claim of onaah, he can still claim onaah and have the excess returned to him. After all he needed the cloth, so that he agreed, otherwise he stood to lose much because he would default on his order. The seller knew this that is why he could overcharge as in the case in Bava Kama.”

Legally, onaah primarily applies to cases where the articles bought or sold have a known and accepted price. Onaah refers to the amount of the overcharge. So, any overcharge or undercharge that is one sixth of that market price has to be returned to the buyer or the seller; anything above that, not only has to be returned but the whole transaction may be set aside. That the parties normally waive anything less that one sixth is the reason why it was it chosen as the benchmark for action in onaah.

The sale by public auction illustrates these ideas very clearly:

“Everybody knows that in sales of this type, one sometimes pays less than the market price or more. The same applies to the people who put their goods on auction. The whole concept of the auction is based on this knowledge and on the assumption that for some articles or on one type of goods, a person will lose something but will gain on others, relative to the market price Therefore, anybody entering this kind of transaction cannot claim protection of onaah if he paid more than or received les than the market price” (Shoel U Meishiv, [Rabbi Shaulson, Eastern Europe, 19th century], part 3, section 137).

Sometimes when the nature of the sale may be such that the assumption is that one should be paying less than the market price, onaah does apply.

QUESTION.

“The librarian of one of the yeshivot in New York often sells excess copies of books at above market price. Is there onaah?”

ANSWER.

“The laws of onaah do apply. The customers of the library are yeshivah students and they assume that the books were being sold at below market prices. This is not the same as those charitable auctions where the people go prepared to pay more because of the cause behind it [in that case one may regard it as charity and not a business transaction, so the price factor is irrelevant]. Since in our case, the customers assumption was that the price would the market price, if not lower, onaah applies and the charitable status of the yeshivah does not give it the same protection as hekdesh [things donated originally to the Temple and later to any communal purpose; these are freed of the limitation of onaah] ” (Mishneh Halakhot, [Rabbi Menasheh Klein, present, New York] volume 9, section 364).

There is a ruling that onaah does not apply to real estate, promissory notes or slaves, possibly because of the difficulty of determining a market price because of the many personal interests and the degree of risk aversion involved. It must be stressed that the ruling does not mean that one is permitted to overcharge with regard to them, only that the cut-off point of one-sixth does not apply as we see from the following teshuvah of the Rosh-Asher ben Yechiel late 12th century Spain:

“Concerning the house which Reuven bought from Simon at twice the market price, you know that the law of onaah does not apply in the sale of land. The Rif [Rabbi Yitschak Alfassi, 11th century North Africa] has claimed, in accordance with the ruling of the Rambam, that a sale of land cannot be voided because of onaah, even if there is great overcharging. However, Rabbenu Tam [the Tosafist, grandson of Rashi, twelfth century Franco- Germany] stated that in the case of twice the market price, onaah does exist even in real estate. This is the correct decision” (Teshut HaRosh, Klall 1, section 7). This principle regarding real estate has been re-echoed in the decisions of the Israeli courts.

The Rosh in addition to telling us that one was not allowed to overcharge even the bench-mark one-sixth, also ruled that pious Jews do not take advantage of the doubt whether onaah existed where it was not ‘shaveh prutah’ – of less than significant value or whether it existed regarding trade in coins. “In the end, one is guilty [even if not punishable for less than shaveh prutah] of overcharging and therefore of gezel, theft, even for smaller sums.”

In many outlying areas or even the suburbs of a large town, we find that the prices are usually higher than in the center of town. Does onaah apply? We would allow for the costs involved in moving the goods. However, the higher prices often flow from a monopoly status enjoyed by the local merchant. Free marketers would argue that if it was worth their while, the consumers would go to town and many authorities agree, so there is no onaah. However, there is the element of full disclosure of the price differential that lies at the heart of our attitude to onaah, so many authorities have decided that in its absence, one is entitled to claim onaah.

This column presents general principles for approaching business ethics topics. For specific guidelines, please refer to a halachic authority.

Dr. Meir Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the Business Ethics Center of Jerusalem.